Valuing an Asset with an Infinite Life

When we value businesses and firms, as opposed to individual assets, we are often looking at entities that have no finite life. If they reinvest sufficient amounts in new assets each period, firms could keep generating cash flows forever. In this section, we value assets that have infinite lives and uncertain cash flows.

Equity and Firm Valuation

In the section on valuing assets with equity risk, we introduced the notions of cash flows to equity and cash flows to the firm. We argued that cash flows to equity are cash flows after debt payments, all expenses and reinvestment needs have been met. In the context of a business, we will use the same definition to measure the cash flows to its equity investors. These cash flows, when discounted back at the cost of equity for the business, yields the value of the equity in the business. This is illustrated in Figure 4.6:

Figure 4.6: Equity Valuation

Assets

Cash flows considered are cashflows from assets, after debt payments and after making reinvestments needed for future growth

Assets in Place

Growth Assets

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